This article is taken from Merryn Somerset Webb’s free weekly personal finance email, Money Sense. Click here to sign up now: Money Sense
There’s been nothing but complaints – and as the days go by increasingly vitriolic ones – since Alistair Darling made his Pre- Budget speech on the 9 of October proposing a new 18% flat rate capital gains tax (CGT) for all. (To read our briefing on the CGT changes, click here: Darling’s daring tax reforms.
The British Chambers of Commerce, the CBI, the Federation of Small Businesses and the Institute of Directors feel so strongly about the whole thing that they’ve got together to write a letter to Darling to make clear the depth of their “shared concern” about the risks of “serious damage to this country’s entrepreneurial culture.”
Hot on their heels came a petition signed by 9,000 entrepreneurs and posted on the Downing Street website. The organiser of the petition, Duncan Cheatle, founder of entrepreneurs group The Supper Club, has been telling everyone who asks that “entrepreneurs are now saying that they’d rather invest in property because what’s the point of taking risks and investing in businesses.” Listen to him and his supporters and you’d think the direct and immediate impact of the change would be the total collapse of the UK economy.
But are the changes really that terrible? Look a little closer and you will see that they are not. The small business lobby is fond of saying that their tax bills are to “double” but this is only the case because they were starting from such a low base (10%) in the first place. Now it is clearly true that anyone who sells a business after April will end up paying more tax on the bill than anyone who sells before April. But if anyone is going to suggest this means the end of entrepreneurship in the UK they must think that knowing about it in advance would have stopped those people setting up businesses when they did, which I’m pretty such it wouldn’t have.
A survey out last week from Orange Business Services showed that while nearly half of all UK adults have thought about setting up their own businesses one in two of those are “too scared” to do anything about it. And it isn’t taxes they are too scared of. No, taxes aren’t even on the list of terrifying things at all. Instead most people are scared of failure (which is entirely reasonable – most busineses fail within 12 months). Most entrepreneurs start off thinking about building businesses and making money, not selling them and paying tax – I’d be surprised if half those trying to raise money for their big ideas now know how the current corporation tax system works, let alone the CGT system.
I also don’t buy the idea that the sharp rise in CGT for investors in small companies (again from an effective rate of 10% to 18%) should put you off if you come across something good – let’s not forget that you don’t pay tax unless you make money! Nor that you can make £9,200 a year in capital gains before you even have to start thinking about tax at all.
A third group of people concerned about the impact the new rules might have are staff working for publically listed companies who have been able to buy shares in their company as part of their compensatioin scheme. They too used to be able to pay a rate of only 10% on any gains they made if they held on to their shares for two years, and from April they too will pay 18%. But once again I don’t see the problem. 18% really isn’t a very high rate and at the risk of getting repetitive it is vital to remember that you can make capital gains of £9200 every year before paying any tax at all. 1.7 million of us own shares in the companies we work for but how many of us own so many that we are going to use up our allowance every year if we sell them? Not many.
So, lets go back to the idiotic statement from Duncan Cheatle that the entrepreneurs he knows would now prefer to invest in property than in new businesses because it is somehow a better bet. This can’t possibly have even a grain of truth in it. It is now clear to anyone who can add up that the buy to let business has gone bad. Only a few years ago you could buy properties that would pay you more in rent that they cost you in mortgage with the result that you made money both in cash terms every month and in capital terms as the value of your property rose.
But that’s not true any more. Now rental yields across the nation are lower than mortgage costs. (If you can get a mortgage at all, of course – apparently there are now 40% fewer products on the market than there were even six months ago.) Worse, capital values of houses and flats aren’t going up any more (in many cases they are going down). (For more on the current state of the UK property market, read: Why tax changes won’t save the UK property market). So why would you buy?
Entrepreneurs are supposed to be good with numbers so my guess is they wouldn’t, regardless of the tax situtation. The truth is this: if you want to be really rich the best way to do it is to start your own business. Get it wrong and there’ll be no tax to pay anyway. Get it right and when you come to sell for millions of pounds I can assure you you won’t even notice an 18% tax bill. Most of us know this and that’s why 81% of 25-34 year olds told the Orange survey I mention above that they would really like to set up their own businesses at some point.
For information on how to do this see my own book Love is Not Enough: The Smart Woman’s Guide to Making and Keeping Money, or for a more detailed how-to look at things see Starting a Business for Dummies by Colin Barrow.